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by James B. DriscollMonday, August 8, 2011 More bad news for ‘America’s Worst Decade’

Next decade? Toxic politics promises to make economic matters much worse than even today.

“The U.S. economy appears to be coming apart at the seams,” warned Columbia Professor Robert Lieberman earlier this year in “Foreign Affairs.”

“This Fight Ain’t Over: Think the debt ceiling gridlock was ugly? Congress is just getting warmed up. Here are eight more foreign-policy battles right around the corner” when they get back to sinking the economic recovery even deeper this fall.

All punctuated last week by S&P’s downgrade of the U.S. credit rating, as well as the one-day 513-point market drop into a double-dip recession. Another “Foreign Policy” expert, James Taub, warns of what the “debt-ceiling deal tells us about the Tea Party’s grim vision of American power.”

A disaster ahead, Taub writes: “All Guns, No Butter … depleting the national treasury to pay for the military … when many Americans want to reduce the role of government at home and especially abroad, the debt deal just concluded is likely to preserve the country’s hypertrophied defense budget, at least if congressional Republicans get their way.”

And Mitch McConnell, the GOP’s Darth Vader, is doing just that, doubling down on his vow to make certain Obama is a one-term president, intentionally ignoring the collateral damage, killing economic recovery.

How? Ol’ Mitch is already sabotaging the new Congressional “Debt Super-Committee,” vowing to appoint only Republicans who have signed Grover Norquist’s “no new taxes” pledge.

Expect more deadlocks as economists warn that recovery is impossible without new revenues.

But it’s beyond toxic non-democratic pledges. America really is “coming apart at the seams.” Both parties: Dems for lack of strong leadership. The GOP and the Tea Party with their bizarre Shumpeterian conviction that destroying the economy is the only way to save America and pave the way for a revival of their anarchistic free market Reaganomics.

Political Wars Sabotage Economy

Yes folks, our politicians really are out of control, utterly unable to manage the economy. They’re irrational, and worse, clueless and myopic in economics. No surprise the market crashed 513 points one day last week and 635 points on Monday, for the DOW to close at 10,809,89. Nor that pundits are pointing to high tech multiples, warning of a new dot-com crash and double-dip recession. Warning of a collapse in commodities, in emerging markets and endless debt problems for Europe. Warning, in short, that we’re headed into a perfect storm rivaling the disastrous political insanity of the 1930s that prolonged the depression, driving the economy into far reaching global problems that added fuel to an irrational zeitgeist and world war. And more.

The housing bubble of the early 2000s was “unprecedented” and the “biggest in U.S. history,” according to Yale professor Robert Shiller.

As a result, he says “it’s very hard to forecast” where housing goes from here, now that it has officially fallen into double-dip territory, based on the S&P Case-Shiller Index.
Housing “might fall [another] 10-25% in the next few years,” but forecasting housing today is harder than predicting the weather, Shiller says. “I don’t see how anyone can quantify a forecast because it’s such an unusual event.”

In his latest books, The Subprime Solution and Reforming U.S. Financial Markets, Shiller argues the path to recovery is paved with financial innovation; 11 million homeowners under water is proof “they weren’t protected and need a way to hedge their housing risk.”
But “the economy is sick right now [and] I don’t have any miracle cure,” he admits.
Best known for his earlier works, Animal Spirits and Irrational Exuberance, Shiller is arguably the world’s foremost authority on financial bubbles. So if he can’t predict with any certainty where housing is going, what hope is there for the rest of the punditry?
The American Dream: Myth vs. Reality
One reason Shiller is so renowned is his extensive work on the long-term history of financial markets. Typically, markets fall below their long-term average after bubbles burst, one reason why the bears see much more pain ahead for housing even if prices are now back to 2003 levels. But stocks didn’t ‘revert to the mean’ after the bursting of the 1990’s bubble and Shiller says there’s no “hard and fast rule.”

Speaking of rules, many Americans were raised to believe that housing was always the best investment. But on an inflation-adjusted basis, U.S. home prices were flat from 1890 to 1990, according to Shiller, meaning the whole concept of housing wealth was “a bill of goods.”
But the idea of the “American Dream” does have merit. “Home ownership pays a dividend in self respect,” he says. Indeed, the idea of owning your own home has personal and societal benefits; the problem was the widespread misconception that housing was the path to wealth and financial freedom. Until next time.

Why the Debt Ceiling Is Important, and Its Impact on the Markets and Economy

Should the debt ceiling be eliminated? A bit of history and a little forecasting.

Congress on both sides of the aisle is playing a game of political chicken with the debt ceiling (see latest developments here); but what would actually hitting the ceiling mean for the markets and the economy in general?

Although the U.S. hit its $14.3 trillion debt ceiling on Monday, May 16, economic Armageddon hasn’t yet rained down on the U.S. economy. Thanks to some slick Treasury Department maneuvering, the date when the U.S. really reaches the limit has been pushed to around August 2.
But instead of breathing a sigh of relief and resolving to engage in a bipartisan effort to resolve the debt ceiling issue in advance of the August drop-dead date, both sides are likely to wait until the last moment to avoid impact—threatening our fragile economic recovery in the process.
What Happens if We Hit the Debt Ceiling?

According to Treasury Secretary Timothy Geithner, reaching the ceiling would force the government to default on some of its obligations, which would have a “catastrophic economic impact.”
In the—however unlikely—worst case scenario, if the federal government is unable to borrow additional money, it could default on some of its obligations. Funds brought in from new debt issues are used to make principal and interest payments on the national debt. Without the ability to borrow additional funds, the Treasury could be forced to default on some of its debt.
Last week, the ratings service Moody’s warned that “if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the U.S. government’s rating under review for possible downgrade, due to the very small but rising risk of a short-lived default.”
Despite assurances by some Republicans and othersthat default would have little concrete effect on government operations or the economy, the effect would likely be devastating. A U.S. default would ripple through the world economy and markets, destabilizing every corner of the markets. Trillions in capital would vanish from world markets in the blink of an eye.

“Without an increase in the debt limit, the Treasury would be unable to meet all of the government’s existing obligations, which could undermine the U.S. government’s reputation in capital markets and raise costs of federal borrowing,” according to the Congressional Research Service’s recent history on the debt limit. An increase in the cost of borrowing for the U.S. would then increase the cost of borrowing for corporations and other borrowers, stunting economic growth.

Is it Time to Eliminate the Debt Ceiling?
Some commentators have suggested eliminating the debt ceiling, arguing that other checks and balances have replaced the need for the limit. The ceiling was first put into to place to prevent continuous financing battles in Congress that could hamper the Treasury’s ability to fund the government’s operations.

But the debt ceiling plays a valuable role in Washington by forcing periodic debate and compromise in Congress and forcing our elected officials to justify their unbalanced budgets.
Prior to World War I, Congress had to approve every debt issuance. The debt ceiling was introduced to give the Treasury the flexibility it needs to finance the federal government without being forced to seek Congressional approval at every turn.

As evidenced by the widespread coverage of Congress’s debt talks in the mainstream media, the debt ceiling still serves an important purpose by forcing our elected officials to publicly justify their spending.
So, Will We Hit the Ceiling?
The answer is “Probably not.” The debt ceiling has been raised about 80 times since it was enacted in the early 20th century. It’s hard to believe that Republicans are doing anything here other than playing political chicken with the debt ceiling. August 2 gives them enough time to make their pre-2012 elections point, get some spending cut concessions from the Democrats, and then sign on to an increase.

But all is not well that ends well. The longer Republicans wait to increase the debt ceiling, the greater the chance the country’s cost of borrowing will increase. Approaching the absolute drop-dead date of August 2 and then increasing the limit at the 11th hour increases uncertainty in the markets and will likely push up the government’s cost of borrowing.

Although the markets didn’t see a precipitous drop in the lead up to the soft May 16 deadline, you can bet that stress in the markets will increase exponentially the closer we get to August 2 without an agreement to extend or eliminate the ceiling.